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Non-Fungible Token (NFT) Explained

The decentralized Finance (DeFi) has seen a big boom in 2020. While the DeFi is still going strong, investors are already looking for the next big thing. Many analysts feel that the NFT market will be the next one to boom. What is a non-fungible token or NFT? This article will have non-fungible token explained. It is a beginner’s guide for NFT.

Non-fungible token explained – what is fungibility?

The abbreviation NFT comes from the words non-fungible token. The word fungible might not be familiar to many people, especially those who don’t have English as their mother tongue. Fungible and fungibility are not used much in common discussions.

The synonym for fungible is interchangeable. When something is non-fungible it’s unique. Let’s dive into the history to understand why fungibility is so important for money and cryptocurrencies.

Gold and silver were used for exchange in Egypt already 5000 years ago. They were not money, though. This was because each piece of metal was in different sizes and weights and contained various amounts of gold or silver.

The solution to this problem was the introduction of money in a form of coins. This revolutionized trade, commerce, and the development of mankind about 2500 years ago. When gold and silver were minted into coins of equal size and weight, fungibility was born.

Check the video below if you want to learn more about monetary history.

Fungibility is therefore an essential attribute for money. It is not just for coins but also for bills and digital money. Fungibility enables money to be divided into smaller units, which are all interchangeable with each other.

For example, I can change a 20 euro bill for one 10 euro bill and five 2-euro coins. I could also change a 100-euro bill for five 20-euro bills and I would still hold an equal value of euros.

Fungibility is also present in the digital world – both with fiat money and cryptocurrencies.

Non-fungible tokens vs other cryptocurrencies

All normal (regular) cryptocurrencies have the fungibility feature explained earlier. One bitcoin in my wallet has equal value with one bitcoin in my friend’s wallet. If you owe one bitcoin to your friend, you can also send him five payments of 0.20 BTC each.

The previously described feature is true to a certain extent. Since this article is a guide for newbies, we don’t go deeper into the subject of “dirty bitcoins”. You can search more of that from Google.

To keep things simple between “fungible” and “non-fungible”, let’s just say all normal cryptocurrencies are always interchangeable between each other. In practice, this is true in all normal use cases.

In the beginning, you could only create fungible cryptocurrencies. All standard cryptocurrencies are also born (mined) to existence with this feature. How does a non-fungible token differ from a fungible coin, then?

The predecessor of NFT was the idea of “colored coins”, which was introduced already in 2012. You can read more of the history of NFTs from here.

The concept of a non-fungible token didn’t hit the mainstream until late 2017. That is when CryptoKitties online game became hugely popular. It clogged the entire Ethereum network due to increased transaction amounts.

CryptoKitties 2020

The game still exists, and every crypto kitty is in fact, an NFT. This is also when the Ethereum ERC721 standard was born. It provides a framework and rule set for creating NFTs. Many readers might know ERC20, which is the standard for normal, fungible, tokens.

A non-fungible token is almost like a standard token with steroids. It has the same basic features as a fungible token, meaning it is 100% digital and it can be sent to anyone and stored in a cryptocurrency wallet. Non-fungible tokens can be also traded on exchanges.

One major difference is that a non-fungible token cannot be divided into smaller pieces. You will soon understand why, when we’ll go to NFT use cases.

When we are talking about a non-fungible token, it’s critical one can be sure that it is unique and/or the number of NFTs is truly limited. This is why blockchain is so useful. Each token and its supply can be checked any

The next development stage is already here and that’s called the ERC1155 standard. It will make the NFT creation process much faster, simpler, and more efficient. Check this article, if you want to read more about the differences between ERC721 and ERC1155.

Non-fungible token explained – NFT and gaming

When you think of a non-fungible token, think collectibles or art in the analog world. But now we are in the digital world, which comes with some added benefits.

If you buy a collectible item, which is branded as “special limited edition”, how do you know it is true? How do you know that only a certain amount of these items exists? This is where blockchain benefits arise.

Not only can blockchain verify the amount and uniqueness of each token, but we can also verify who owns it. It is also easy to transfer the ownership of a token from one person to another. Think about a digital ticket to a sporting event or concert, which could be created using non-fungible tokens.

The previously mentioned CryptoKitties is a game that brought the NFT concept to the mainstream. That is not the only blockchain game where NFTs are being used. The most popular ones are currently Decentraland and Gods Unchained.

Watch the video below if you want to learn more about Gods Unchained.

Decentraland is a virtual world, where players can purchase land. Gods Unchained is a digital board/card game, where each card has unique strengths, just like in Pokemon. Those interested in football cards should check a game called Sorare.

Some readers might be familiar with World of Warcraft and other similar adventure games. Here you could use the NFT technology on weapons and other in-game items. If you want to stop playing, you sell your items in an NFT marketplace.

It might be also possible to transfer NFT-built game items from one version of the game to another. This would open endless possibilities in the gaming world. NFT technology and games really do fit together. If you are interested in this subject, check also Enjin, which might be a big hit in 2021.

You can buy Decentraland’s MANA token or Enjin’s ENJ coin from Binance.

NFT beginner’s guide – more use cases

NFT and games fit very well together, as mentioned earlier. There is also one other popular use case for non-fungible tokens: digital art. There are already online marketplaces for art-NFTs.

Probably the best known of such sites is Rarible (see the image below). This application has also its native token, RARI.

rarible

Open Sea is another popular marketplace for crypto collectibles.

NFT has a connection to the DeFi market as well. When the price discovery mechanisms improve, it will be possible to use NFT items as collateral on DeFi loan platforms like Aave.

Digital art items are not the only use cases besides gaming. There are also crypto domains (.eth and .crypto), where NFT technology is being used. These domains allow you to send funds to a person using an address like satoshinakamoto.crypto or vitalikbuterin.eth.

There is also the entire financial sector, which has endless use cases for NFTs. The words digitalization and tokenization are often mentioned. In the future, you’ll be able to invest in Apple stock by buying an NFT token instead. You will be also able to tokenize your financial assets.

The future of non-fungible tokens

NFT is a buzzword, which we’ve seen being used for a couple of years already. Many analysts expected NFT to become “a thing” already in 2018-2019. This never really happened. The NFT market is still exceedingly small in late 2020.

However, the rise of DeFi has given a big boost to the NFT market. Now it’s almost impossible to browse social media for one day without seeing a post or tweet about NFTs. It’s also obvious that NFT and DeFi are connected in many ways.

A good example is Aavegotchi, which is an NFT project built by the DeFi lending platform Aave.

Investors are always looking for the next sector to boom, which would provide up to 100x profits for early birds. DeFi has given 10x, 20x, 50x, and even 100x profits for smart investors, who bought these unknown tokens in 2019.

It was difficult to invest in DeFi in 2019 since there was truly little information available. Big exchanges didn’t list many of the DeFi tokens either. Even in the spring of 2020, you had to use decentralized exchanges (like Uniswap) to purchase promising coins.

The NFT market looks just like the DeFi market was in mid-2019. The market size is tiny, and many of the most promising NFT projects aren’t listed in the big crypto exchanges yet. It might be that NFT will do in 2021 what DeFi did in 2020.

The good thing is that non-fungible tokens are easy to store. You can use a web 3 wallet like MetaMask. Trustwallet and Enjin wallet are also popular storages for crypto collectibles.

Check the video below for more NFT investing ideas.

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